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Gratuity is the amount that an employer pays his employee, in return for services offered by him to the company.
The employees who have been employed by the company for more than five years are eligible for a gratuity amount. It is governed by the Payment of Gratuity Act, 1972.
The employee can get the gratuity before five years if he/she gets disabled in an accident or due to a disease. Gratuity mainly depends on your last drawn salary and the years of service which are rendered to the Company.
To receive the gratuity, you must meet the following eligibility criteria:
The Gratuity is calculated based on the following calculation.
Gratuity = n*b*15 / 26
Where n = Tenure of service completed in the company
b = Last drawn basic salary + dearness allowance
For example, you have worked with the ABC company for a period of 15 years. Your last drawn basic salary along with dearness allowance was Rs 40,000. Hence:
The amount of gratuity = 15 * 40,000 * 15 / 26 = Rs 3,46,153
Other Conditions and Eligibility
As per the Gratuity Act, The amount of gratuity cannot be more than Rs 20 lakh.
The tax treatment of the gratuity amount depends on the type of employee who has to receive the gratuity.
The amount of gratuity received by any government employee if comes under central/state/local authority is exempt from the income tax.
Any other eligible private employee whose employer is covered under the Payment of Gratuity Act. Here, the least of the following three amounts will be exempt from income tax:
The government has set Rs 20 lakh as the upper tax-free limit.